Earnings estimates for DISH Network Inc. (DISH) are on the rise following the company’s encouraging financial results for fourth quarter 2009 with significant growth in net subscriber additions. Fourth quarter EPS of 40 cents was above the Zacks Consensus Estimate of 33 cents. Quarterly total revenue also increased 1.4% to $2.96 billion, from $2.92 billion in the year-ago period.
DISH is the second largest satellite TV provider in the U.S. after DIRECT TV (DTV) and the third largest pay-TV provider after Comcast Corp. (CMCSA) and DIRECT TV. The global economic downturn has negatively impacted the pay-TV industry in the last couple of years.
Furthermore, the penetration of pay-TV households approaches 90% in the U.S., leaving little room for any significant future growth. Under this challenging scenario, DISH was able to increase its full year 2009 total revenue by 0.4%, and its core subscriber-related revenue (around 99% of total revenue) was up 0.7% compared to full-year 2008.
Significant Subscriber Growth
In the fourth quarter of 2009, DISH gained 249,000 basic video customers to end the year with 14.1 million total subscribers. Its closest rival DIRECT TV gained only 119,000 customers to end 2009 with 18.6 million total subscribers. Most importantly, in the same period, all the cable TV giants like Comcast, Time Warner Cable Inc. (TWC) and Cablevision Systems Corp. (CVC) lost basic video customers.
Operating in a near-saturated industry, DISH was able to win subscribers from its rivals due to aggressive promotional programs and effective advertising. The company’s churn rate reduced due to the recent completion of the security access device replacement program and increased new subscriber commitment periods.
Potential Growth Catalysts and Challenges in 2010
DISH continues to position itself as a low-price leader in the U.S. pay-TV industry by subsidizing the cost of equipment and installation to increase its subscriber base. The company also focuses on increasing distribution of highly rated DVR and HD (High-Definition) equipment as value-adds to drive subscriber growth and retention.
DISH has unveiled its unique TV Everywhere services. TV Everywhere is a suite of integrated products designed to maximize the convenience and ease of watching TV anytime and anywhere. TV Everywhere services will enable DISH subscribers to access all their live and recorded programming on a laptop, mobile device, or anywhere in the home using DISH Network WiFi Monitor.
On the other hand, the pay-TV market is highly competitive. In addition to satellite TV providers and cable operators, telecom powerhouses like Verizon Wireless (VZ) and AT&T (T) are deploying fiber-based networks to provide high-speed residential video services.
Recently, DISH lost a legal battle to TiVo Inc. (TIVO) related to DVR technology. TiVo was awarded $300 million by the U.S. Court of Appeals for the Federal Circuit in the Eastern District of Texas.
Estimate Revision Trend
Based on the company’s performance, several analysts following the stock have revised their estimates for DISH. Considering the catalysts and challenges in 2010, analysts are fairly divided in either direction. Over the past 30 days, 5 of the 19 analysts following the stock have raised their earnings estimates for fiscal 2010, with 4 analysts moved in the opposite direction.
On balance, 2010 estimates are up 2 cents, with the current Zacks Consensus Estimate being $1.88. This is a significant improvement of 15.82% compared to fiscal 2009.
According to our assessment, aggressive advertisement campaigns, increases in customer paid monthly bills due to price increases and more orders for the pricier HD TV packages, and an expected revival of ARPU (average revenue per user) due to the rolling-off of a six-month promotional package will help the company to achieve its goals.
The introduction of TV Everywhere is also likely to help DISH increase its subscriber base, as this business is gaining popularity gradually among basic video customers in the U.S.
Earnings are also on the rise for fiscal 2011, with 3 of the 16 analysts following the stock raising their estimates over the last 30 days, whereas 2 analysts moved in the opposite direction during this time period. On balance, 2011 earnings estimates have gone up by 3 cents, with the current Zacks Consensus Estimate being $2.13.
Meanwhile, we notice that 2 of the 16 analysts covering the stock have raised their earnings estimates for the first quarter of fiscal 2010 over the past 30 days while 1 moved in other direction. For the second quarter 2010, 3 of the 15 analysts covering the stock have raised their earnings estimates while 1 lowered. Overall the near-term first half 2010 earning estimates are favorable to DISH due to expected lower churn-rate.
On balance, earnings estimates for the first quarter are up by 1 cent, with the current Zacks Consensus Estimate standing at 51 cents, down 27.77% year-over-year. Earnings growth should pick up as the year progresses. This is evident from the second quarter earnings estimate, which is also 51 cents now but up 51.37% year-over-year.
In terms of earning surprises, DISH remains very volatile historically. In the last four quarters, there have been two significant downward surprises as well as two significant upward surprises, with a four-quarter average of negative (-15.84%). However, those four quarters mainly consists of the period when DISH was losing customers due to both competition and macro economic uncertainty.
We believe DISH has successfully tackled those difficult situations, and management’s decisions on marketing promotions and the completion of security access device replacement program have helped the company to sustain its sales and reduce customer churn. The current Zacks Consensus Estimate for full-year 2010 is $1.88. There exists no upside or downside potential (essentially a proxy for future earning surprises) of this estimate. With respect to full year 2011, there exists positive upside potential of about 1.88%.
Our Recommendation
We currently have a Neutral recommendation on DISH, which is supported by the Zacks #3 Rank (Hold). Although economic weakness, inter-industry and intra-industry competition for basic video and the near-saturation of the pay-TV market slowed down earning growth in 2009, we believe DISH is weathering the storm relatively well.
Read the full analyst report on “DISH”
Read the full analyst report on “DTV”
Read the full analyst report on “CMCSA”
Read the full analyst report on “TWC”
Read the full analyst report on “CVC”
Read the full analyst report on “VZ”
Read the full analyst report on “T”
Read the full analyst report on “TIVO”
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